If we are what we eat, and you get what you paid for. It should come as no surprise that with the TRILLIONS of dollars our government fed Wall Street, all we got was more of
Seriously, why did we want to save this?
On Thursday, JPMorgan Chase became the latest big bank to announce stellar second-quarter earnings. Its $2.7 billion profit, after record gains for Goldman Sachs, underscores how the government’s effort to halt a collapse has also set the stage for a narrowing concentration of financial power.
Both banks now stand astride post-bailout Wall Street, having benefited from billions of dollars in taxpayer support and cheap government financing to climb over banks that continue to struggle. They are capitalizing on the turmoil in financial markets and their rivals’ weakness to pull in billions in trading profits.
JPMorgan’s renewed strength, like Goldman’s, comes as it vaults ahead of longtime rivals, especially in investment banking, including bond and equity trading, and underwriting debt to help companies issue shares and bonds. Traders took advantage of big market swings and less competition to post big gains in fixed-income and equities.
Michael J. Cavanagh, the chief financial officer at JPMorgan, said its profit and fees from this business were “a record for us in a quarter and a record for anybody at any firm in any quarter.” The bank, he added, was “so very proud of those results.”
Mr. Dimon is also gearing up for a series of battles in Washington. One is over tighter regulations for derivatives, a business where the bank generates lucrative fees as one of the industry’s largest players.
Another is the creation of a new consumer protection agency, which could threaten the profitability of the bank’s mortgage and credit card businesses if it introduces tougher regulations.
“Our model really never changed,” Goldman Sachs Chief Financial Officer David Viniar said yesterday in an interview. “We’ve said very consistently that our business model remained the same.”
Goldman Sachs, which was the biggest U.S. securities firm before converting to a bank, is the only one of its major Wall Street rivals that hasn’t been transformed by the financial crisis. Lehman Brothers filed for bankruptcy in September, while Bear Stearns Cos. was taken over by JPMorgan Chase & Co. and Merrill Lynch & Co. was sold to Bank of America Corp.
While the risk-taking has paid off for Goldman Sachs so far, some question whether it could be a perilous example for others to follow.
“Do we want other people trying to emulate what they’re doing, perhaps not with the same skill or resources?” asked Arthur Wilmarth, a professor at George Washington University law school who specializes in issues related to banking. “Regulators ought to be concerned and say ‘Is Goldman making this money with any kind of reasonable prudence?’”
What part of this is going to save our economy?
Ahead of its Tuesday earnings report, Goldman got a boost with Ms. Whitney’s upgrade today, in which she moved the firm to “buy” from “neutral” and increased her earnings-per-share estimate for the second quarter to $4.65 versus the Street’s estimate $3.48 estimate.
Why? Ms. Whitney’s call doesn’t stem from an inkling that the economy might improve. Quite the opposite. She says the feeble U.S. economy will be a boon to Goldman as the firm plays a key role in a “tsunami of debt issuance” from governments desperate to backfill growing budget gaps. With once-mighty competitors laid low by the financial crisis, Goldman has less competition now, Ms. Whitney says.
And how does this save Main Street?
While other firms have curtailed risk and preserved cash to protect against further losses, Goldman has returned to what made it so profitable in the past — high-risk trading and investing in everything from mortgages to commodities and underwriting of stock and debt offers.
“Goldman really is in a class by themselves,” said Phillip Silitschanu, a senior analyst with Aite Group. “They’ve always been the golden child of the market.”
Of course, Goldman also benefited because there are fewer competitors on Wall Street following the demise of Bear Stearns Cos. and Lehman Brothers Holdings Inc. in 2008. Both companies were felled by their investments in risky, and ultimately failed, mortgage-backed securities.
When will this bring the rest of us more jobs?
A leading US labour organisation, the Service Employees International Union, said Goldman’s pay practices are a strong argument for root and branch change in Wall Street’s compensation policy to end a culture of rewarding bankers for taking risks.
Stephen Lerner, director of the SEIU’s financial reform campaign said: “They have some kind of moral and economic amnesia. After we bail them out with tens of billions in taxpayers’ funds, they go back to exactly the same practices as before.”
Defending the bank’s compensation practices, Viniar said Goldman had a long established “pay for performance” policy and pointed out that staff saw a sharp drop in payouts when times were tougher in 2008. But he said: “If we do perform well, our employees will be rewarded appropriately.”
Analysts say that Wall Street trading houses face less vibrant competition after the demise of rivals such as Bear Stearns and Lehman Brothers, making it slightly easier to gain a financial edge. Gerard Cassidy, a banking analyst at RBC Capital Markets, said Goldman’s brand, viewed as trustworthy, and its ability to attract top talent contribute to the firm’s success.
“The economy’s not out of the woods yet but I would say the dark days of Wall Street are behind,” said Cassidy. “In the first quarter, we saw the first rays of sunshine.This quarter, we’ve got confirmation that the sun is shining brighter and that it will continue to do so as the economy recovers.”
More food for thought -
From Eliot Spitzer on Bloomberg:
From Matt Taibbi on MSNBC: